The Dow Jones FXCM Dollar Index (ticker = USDollar) has worked itself into a tight, approximately 30-point range on the boarders of easily recognizable technical levels. For technical traders, this is a situation that says ‘breakout risk’. General market conditions add to the probability of a rebound in activity levels. Monday trading was noticeably curtailed by the absence of US banks. With one of the major financial centers offline for a market holiday (Martin Luther King Jr.), the transmission of risk trends was disrupted and the result was a slow start to the week for market-wide speculative trends. With liquidity filling out in the upcoming session and boundaries at hand, volume can easily stoke volatility. The question is what direction this market move takes.

It is worth noting that the rolling, six-month correlation between the greenback and S&P 500 is a robust 0.82 (at 1.00 the measure comes it indicates the two move essentially in lockstep). This is evidence enough that we should not merely presume a ‘risk on’ or ‘risk off’ move will readily define the dollar’s move. In overnight futures trading, the S&P 500 moved back up towards the 1,850 level it had established as temporary resistance since the beginning of the year. Were the dollar playing the traditional safe haven, this imminent threat would present a significant bearish risk for the dollar. Yet, a currency that has found value beyond its safety appeal and a market dubious of the constant build up of exposure neutralizes this risk significant. That said, volatility has a way of returning the market to its baser nature.

Unscheduled event risk this week may put the currency under power to help direct its own pace through the current. Though the definitive release schedule is light, there are a few events worthy of the FX trader’s attention. In particular, we should watch out for the Federal Reserve Bank of New York’s Survey of Primary Dealers. This collection of expectations from those financial firms that underwrite Treasury sales is a much-needed update for Taper speculation when the Fed enters radio silence in the week leading up to the FOMC’s next rate decision (next Wednesday on January 29). Furthermore, the New York Fed is expected to release a pilot survey of ‘Market Participants’ expectations for the first time before this next Fed announcement.

If we were to use Euro-area risk premiums as our gauge, bailout countries in the region are seen reentering a period of robust economic growth. Short-term government bond yields for Spain, Italy and Ireland amongst others have fallen to multi-year – if not record – lows. To end last week, Moody’s upgradedIreland’s rating to investment grade and Standard & Poor’s removed Portugal from its ‘credit watch’ list. Those are token improvements though to much larger fundamental deficits. While further recovery is likely, the road ahead is a long and highly likely to find some trouble along the way. Is the market simply naïve to the risks or is there something else at work? Like the S&P 500’s climb to record highs, European assets – particularly the riskier brand – are drawing yield-hungry investors. That makes the euro exposed to risk and leverage.

New Zealand Dollar Rallies as 4Q CPI Leverages Hike Expectations

In the past weeks, we have been notableinflation readings from regions such as the US, UK and Australia. Yet, deviations from these readings translated into relatively little price action for their respective currencies. That wasn’t the case with the New Zealand dollar as it absorbed the country’s 4Q CPI update. The data itself was lukewarm. Inflation picked up a modest 0.1 percent in the three-month period and ticked up to a 1.6 percent year-over-year pace. Both were 0.1 percentage points ‘better-than-expected’. And yet, the kiwi surged after the report. Why? Although these are modest beats, rate forecasts were already pricing in nearly 125 bps worth of hikes over the coming 12 months. This if fulfillment.

Yen Crosses Advance on Equities Bounce, BoJ Rate Decision Ahead

The yen crosses are up across the board to start the week. The traditional fuel for carry trades – risk appetite – is certainly an element to this performance. We have seen the Nikkei 225 advance Tuesday morning and the US-based indexes were gaining ground in the futures market. Yet, an S&P 500 break above 1,850 may not be the impetus for fresh five-year USDJPY highs. For that, the BoJ may be needed Wednesday.

Australian Dollar Unable to Replicate Success of Kiwi on Inflation Upgrade

Much of the attention for the commodity bloc this past session has gone to the kiwi dollar – and for good reason. Volatility is critical for traders. Yet, a similar data update for Australia to open the week failed to generate any activity for the Aussie dollar even though the data was more stirring. The TD inflation report for December hit a September 2011 high (2.7 percent). Perhaps Wednesday’s 4Q CPI data will do more…

British Pound: BoE Member Paper Suggests QE Exit May not be Disruptive

The Bank of England (BoE) published a paper that was in part written by David Miles, in which it was suggested the QE programs the MPC and other groups have implemented have had less an impact on portfolio rebalancing than many assumed. That being the case, the exit may be less traumatic than many currently fear. The BoE is unlikely to test that early. Ahead, Wednesday offers the BoE minutes and jobs data.

The main emerging market currencies have dropped through the opening trading session despite the drift higher for equities futures, the deflation in risk due to the US market holiday and the better than expected 4Q Chinese GDP release. The 7.7 percent pace of growth for the world’s second largest economy was a downtick from 3Q, but was a tick better than consensus expectations.

According to the Commitment of Traders report, futures traders increased their net long gold positions for a fourth week through this past Tuesday. This is encouraging progress from the near eight-year low this exposure reading is recovering from. Meanwhile, the metal itself is facing resistance in the former of regularly contested zones and a prominent 10-month trendline converging on $1,265/260. Though gold has drifted higher alongside the dollar, the best potential for a meaningful bull run would be to see the greenback collapse.